Monthly Archives: August 2012

The tattered relationship between the United States and Pakistan has been patched up yet again—with the political equivalent of duct tape. A low-level Memorandum of Understanding has been signed by bureaucrats, not political leaders, to provide a diplomatic fig leaf. But basic flaws continue to haunt the relationship that has degenerated, again, to a transactional one. For a while, it appeared that the United States and Pakistan had agreed on some common goals for Afghanistan and the region and disagreed only on how to get there. Now, all bets are off.

One strong reason for the failure to reconnect is the lack of a center of gravity in both countries in terms of ownership of the relationship at the highest levels. At one time, Vice President Joseph Biden and then Secretary of State Hillary Clinton appeared to be invested in the relationship in the United States. Special Envoy Richard Holbrooke took it upon himself to knock down some stovepipes and get things moving. Now, policy is being managed, not made, but in bits and pieces and a major part of the new policy seems to reside in Langley—where the drone, an instrument of war, has become a virtual strategy and a policy. There are no indications that the Central Intelligence Agency or for that matter the U.S. government would allow Pakistan the access to drones or control over them that it seeks. If the new director-general of Pakistan’s Inter Services Intelligence managed to claw back some control from his U.S. counterpart or get a written agreement during his recent visit to Washington, D.C., then he can claim a major victory. But chances are slim that this happened during this meet-and-greet encounter.

In Pakistan, the civil and military divide remains a huge chasm. The military has allowed the government to drift at times instead of nudging it into action. In the absence of a national security council, it may be necessary to bring together an ad hoc group of the civil and the military to discuss and agree on key issues of national importance so nothing is left to chance and domestic decisions are not postponed. Involving business leaders may be a critical element in this process. But domestic legal and political squabbles have become a major distraction, with the rampant judiciary playing a major role in creating a climate of uncertainty.

A major reason for the U.S. distraction is that election season is upon us in the United States and neither President Barack Obama nor his Republican challenger Mitt Romney has deemed Afghanistan or Pakistan worthy of public discussion on the campaign trail. If Obama were to find a magic lamp tomorrow with one guaranteed wish, my guess is he would ask for an exit from Afghanistan yesterday! Afghanistan fatigue has set in with the American people, Congress, and the administration. Pakistan fatigue may not be far behind. It will require a determined effort by the American team in Islamabad to make its case in both capitals in the months ahead and to convince the average Pakistani that the U.S. is not ready to fold its tent and fade into the night once more.

What will change this depressing scenario inside Pakistan? Pakistan needs to show a determination to craft and implement sound economic policies at home, adopt a proactive approach to helping stabilize Afghanistan, and mend relations with its neighbors so it does not need to rely on military or economic aid from afar. Improved domestic governance and restoration of economic growth and stability are paramount. But Pakistan too is gripped by pre-election fever. Denial is not the right approach. Half measures will not work. Government needs to think boldly and play the long game. This means taking charge of security and economic policy, and working with the best and the brightest inside Pakistan to ensure that Pakistan is prepared to deal with its looming demographic challenges. Most of the population is very young and Pakistan needs to educate and create jobs for millions of youth entering the workforce in the next decade or two. Once Pakistan begins to take itself seriously, its friends in the United States and elsewhere will find it easier to come to its aid.

Otherwise, the risk is that economic woes at home will lead to the shutting off of the aid spigot from the United States and Europe. And the economic pie inside Pakistan would then begin to shrink further and at a faster pace. The consequences of that will be instability and unrest. Pakistan’s South Asian neighbors seem to be accelerating away from Pakistan in terms of growth and open societies, despite the many short-term growing pains they face. Pakistan can catch up with them if it starts now. Leaving things for another year or two may be too late.

Shuja Nawaz is the director of the South Asia Center at the Atlantic Council. This piece originally appeared in Newsweek Pakistan. Photo Credit: Saul Loeb / AFP

As it completes its 65th year as an independent state, Pakistan faces a host of challenges that only it can resolve, if its people and leaders have the will to do so.

It is no longer the split country that came into being in August 1947. Yet it occupies a strategic location that appears to be determining its destiny. It has been drawn into external conflicts on its western border at least twice, first in the 1980s and then in 2001. And it has fought at least three major wars with India. Although that relationship appears to be thawing, it remains vulnerable to the actions of non-state actors residing in Pakistan whom the state is unable or unwilling to control.

Meanwhile a full-scale insurgency led by the Tehrik-i-Taliban Pakistan continues in the western regions of the country. In Balochistan, a nationalist movement fights for attention while sectarian battles rage involving the Lashkar-i-Jhangvi. Critics of the government and the military allege that some of these actors operate under the umbrella of state agencies.

In brief, Pakistan remains a security state struggling to create a civilian identity, with sharp differences between the elected government and the military that acquired its autonomy partially from Gen Pervez Musharraf and partially from the current administration. More than four years after the government was elected, it has yet to withdraw its remit to the military that had designated the chief of army staff a de facto proconsul to handle all decisions related to security matters in Khyber Pakhtunkhwa. Subsequently, the government indemnified the military for all its actions in the region, creating a virtual martial law. No wonder then that Pakistanis and external observers raise a number of questions related to the future of the country.

Is Pakistan truly ready for civilian rule?

One of the more startling features of conversations with the intelligentsia of Pakistan is the frequency with which they ask when the army is going to act. It is surprising that even today there are those who think a coup would yield the right results despite the history of the country showing how military rule has left it bereft of political development and created economic downturns that bedevilled successor civilian governments.

Another downside to involving the military in government is its professional degradation as its finds itself drawn into areas beyond its normal expertise. The military does not have a comparative advantage in running businesses or political systems, and extended military rule takes senior officers away from their professional duties. The dual-hatted COAS and president Gen Pervez Musharraf did not once visit his troops in the border region with Afghanistan. Gen Ashfaq Parvez Kayani made his first visit within days of taking over and has returned frequently.

Today, Pakistan is more than ready for civilian rule. It needs an active and informed elected government focusing on health, education and employment for its population of some 200 million, half of whom are below the age of 21, if it is to keep up with its neighbours.

How should Pakistan relate to India and Afghanistan?

On the security front, the nuclearisation of its weapons systems has helped Pakistan create a sense of parity and a perhaps a poison-pill defence against what it has traditionally viewed as a hegemonic India. But the conventional military gap is widening as India acquires newer technology and weapons systems and produces more itself. Meanwhile, Pakistan is still encumbered by heavy reliance on military aid and purchases from the West and China. Its defence industries depend heavily on import substitution that is costly and does not ensure parity in the long run, as the rest of the economy sinks to growth rates well below the rate of population growth. A shrinking economic pie will restrict the access of the military to state resources. Increased spending on defence does not guarantee a commensurate increase in security.

A view appears to be developing inside Pakistan and even among the military leadership that the true defence of the country lies in its society and economy and that the threats are not necessarily external. For these views to dominate, there will need to be a national debate on Pakistan’s goals for the next two decades. And then government and civil society will need to work to put the nation on the right path.

A very necessary part of this discussion are the youth of Pakistan. In my recent travels inside Pakistan in connection with an emerging youth leaders’ project, I learned how vibrant this important segment of Pakistani society is. Throughout the country they are launching new movements to serve society not because of government but, in the words of one of Pakistan’s top 100 young entrepreneurs, “in spite of government.”

On the economic front, the opening up of trade relations with India and Afghanistan promises to unleash new economic forces. But fears that the Pakistani military remains entrenched in its opposition to opening up to India remain in both India and Pakistan. A clear, public statement of support from the Pakistani military would do much to destroy the barriers that remain and give the civilian authorities no excuse to drag their feet.

Looking west, what kind of an Afghanistan does Pakistan want?

Traditionally, Pakistan has sought an Afghanistan that relies on Pakistan as its sole land route to the world, resists Indian domination and is either friendly or not hostile. Yet it has seen Afghanistan largely through the Pashtun prism, alienating more than half of the Afghan population. Pakistan also fears that India wishes to encircle it by befriending Afghanistan and investing in its northern, non-Pakhtun areas. Yet both India and Pakistan will need to rely on Afghanistan as a gateway to Central Asia’s energy and trade.

The counterfactual to both India and Pakistan’s current and past behaviour is a collaborative approach to develop Afghanistan, making it a partner in what I would call a Grand Trunk Road Initiative. Both countries would benefit from cheaper gas and hydroelectric power from Central Asia and Afghanistan. Pakistan would be able to export its cement and expertise to Afghanistan, helping transform Afghan suspicions about Pakistan’s attempts to ‘meddle in Afghan affairs’.

Changing the mindset

All these ideas are practicable. But they require a clearer definition of the goals of Pakistani society and government. And they require a broad-based discussion so all parts of the Pakistani population, especially the youth, feel involved and empowered. It is time Pakistan matured into the society that its founding fathers envisaged and that values domestic talent rather than relying on imported ideas and foreign aid.

Shuja Nawaz is the director of the South Asia Center at the Atlantic Council. This piece originally appeared in Dawn. Photo Credit: Getty Images

Shuja Nawaz: Good morning, everyone. I’m Shuja Nawaz. I’m the Director of the South Asia Center at The Atlantic Council, and on behalf of President Fred Kempe and my colleagues at the center, I would like to welcome all of you and thank you for coming in despite the weather.

We are delighted to host Arvind Subramanian today to speak on India’s Economy: An Unusual Past and Uncertain Future. Perhaps it’s not as uncertain as the title suggests and maybe Arvind will be able to spend some time helping us understand that, but I can’t think of a better person to do this. I’m delighted, of course, to welcome him also as a former colleague at the IMF.

But Arvind is currently a senior fellow, jointly at the Peterson Institute for International Economics, and the Center for Global Development. He’s the author of a book called Eclipse: Living in the Shadow of China’s Transformation – China’s Economic Domination. He also wrote India’s Turn: Understanding the Economic Transformation in 2008.

I should note that Foreign Policy named him one of the world’s top 100 global thinkers in 2011. While India Today magazine nominated him as one of the top “35 masters of the mind” over the last 35 years. That’s a very heavy burden that I’m sure he’s bearing extremely well.

But he’s been an Assistant Director at the Research Department of the International Monetary Fund and he’s also worked at GAT on the Uruguay round of trade negotiations. He’s taught at the Harvard University Kennedy School of Government and at Johns Hopkins School for Advanced International Studies. And he contributes frequently to the Financial Times and to other groups. And of course, he was educated in India at St. Stephen’s College, and then, at the Indian Institute of Management at Ahmedabad, taking his Master’s and Ph.D. from Oxford.

I think, with that background, we expect nothing but the best from him. So, I’m sure that all of you will have many questions. I’m going to request Arvind to speak for about 20, 25 minutes, and then, we’ll have a conversation with him. I would request – the conversation is on the record and I would request those of you that have cell phones to, please, switch them off.

We are also delighted to welcome the C-SPAN audience because this event is going out live, and so, we don’t want any undue interruptions. So, with your help, we should be able to begin and end on time, and in an orderly manner.

Arvind, welcome, and the floor is yours.

Arvind Subramanian: Shuja, thank you for that very kind and generous introduction. It’s a great pleasure to be here at The Atlantic Council. You know, August is, generally, not the most heavily-trafficked month in terms of talks and events in D.C. I’m delighted to be here.

I suspect some of the interest in India now is because of the blackout that we saw a couple of weeks ago and I will, you know, kinda talk about that in passing as well.

Let me quickly get – since I have only 20, 25 minutes and I have a rather long PowerPoint, let me just get straight to the – see, this is very much a kinda economist’s perspective on India. You know, politics and security are, basically, way above my pay grade and – but, you know, it’s not hopefully going to be just economics, but economics with some political economy background as well.

I’ve called this Unusual Economic Past and Uncertain Future. I realize that the interest is more in what’s happening now and what’s likely to happen in the near and medium term, but I do want to stress that there is a certain continuity, and in some sense, the uncertainty and the challenges come from, I think, India’s unusual economic past.

So, just a bit of self-promotion, that’s my India book. That’s my recent China book. And in some sense, you know, the more I talk about India, there is this implicit kinda – in everyone’s mind the kinda – contrast with China, which I will, of course, allude from time to time and, you know, I have a book on both countries of errata quality, but I do want to emphasize that there’s an interesting contrast with China that I think should inform our –

So, I’m going to spend the first half of the lecture talking about what I call the unusual economic model, which I call the Precocious India Model. And what I mean by precocious is that, you know, India has been doing things that it is not meant to be doing at this stage of its development. It’s doing things that countries normally do, which are much more advanced in terms of development, and there is a plus side to it, but there’s also a kinda drag that comes from this, which is going to inform my assessment of the challenges going forward.

And then, you know, we can talk about the near-term challenge, the macro challenge, the growth challenge, and I do want to spend a couple of minutes on, really, the big picture on India, what I call the Everything Challenge. That’s – you know, there’s a lot going on here.

But before – see, normally, when I present something on India, I begin by emphasizing something that, I think, people overlook. You know, this is a graph which shows India’s GDP per capita. And I think there have been three phases in India’s economic growth and economic development. The first phase we call the Hindu rate of growth, which, you know, India grew at about 3 percent per year for about 30 years after independence, which is about 1.8 percent per capita. We call that the Hindu rate of growth because people thought, you know, “Indians are not – are more obsessed with the hereafter than the here, and therefore, you know, Indian can –” and that’s what, supposedly, Hinduism teaches one. Of course, that turned out to be complete nonsense because, beginning in 1980, the Indian economy turned around.

I think I want to emphasize this because many people think that, you know, growth actually took off in India after 1991. It’s certainly true that the reforms took off in India after 1991, but growth actually took off, in terms of accelerated, around 1979, 1980. So, India has actually had 30 years of fast economic growth. So, the contrast between India and China is not that China began in ’78 and India began in ’91, but that we both began at the same – both countries began at the same time, except that China did everything at twice the pace that India did.

So, for about 22 years, we had about 5.5, 6 percent growth, and then, you know, between 2002 and 2008, ’09, ’10, and even ’11, we had this rapid phase of takeoff, sorta Chinese-style growth rates. And that’s what, I think, created this buzz about “Shining India” the last seven, eight years, and one could argue that now – which I’m going to later on, that now – the question is, “Are we actually in a forth phase where – which makes the third phase look a bit like an aberration, and that India is actually doomed because of all that it’s been doing, to actually slightly slower growth rates over the medium term than other countries?”

So, this is just by way of background and I think the first aspect of the Precocious India that, you know, everyone knows and talks about – but which I just want to highlight – is that if you plot democracy against development, India is just a massive outlier on the right side, and China is just a massive outlier on the wrong side, given India’s level of per capita GDP. This is kinda broadly the Modernization Hypothesis: given India’s level of GDP, India never deserved to be a democracy.

But it has been for many, many, many years, and this is one of India’s achievements, and the interesting thing, of course, is that China is right at the bottom, and all the states to the right of China are actually oil-exporting countries. So, China is an outlier and this – of course, India will rightly claim this as an achievement, but this is something, I think, that needs to be highlighted in terms of how precocious India has been in its political development.

But the point I want to emphasize next is that, in terms of economics, I think what has really been unusual about India – that it’s been a skill-based model of development, rather than unskilled-based model of development. India, like China, has abundant labor supply – unskilled. It has not used its unskilled labor supply; instead, it has intensively used its skilled labor, and that creates a number of complications.

The number of manifestations of this – it’s not just that India has – does more services than manufacturing, which is true, and certainly much more services than manufacturing than China does; but within manufacturing, too, India does much more skill-based manufacturing than most countries at comparable stages of development.

Here’s a chart I want to show. I wish I knew – oops. I don’t know where the pointer is, but I wish I could show you that, you know, the two – the graph on the left is for India; the right for China. It’s broadly on the same scale, and you can see where manufacturing is in India – way below that in China. And you see services is way above China, so this is one example of the Precocious India phenomenon.

And what I find even more unusual, of course, is that I think what people don’t realize – is the most striking aspect of this skill-based development of India – is the fact that India exports skilled FDI internationally. You know, if you think about the international division of labor, it was meant to be that the rich countries produce skills, technology, entrepreneurship, and finance, and the poor countries provide the cheap labor and the resources, and that’s how the international pattern of specialization is determined. But India has been defying that consistently and, if you look at this chart, this is – so, countries like India and China are meant to import FDI. They aren’t meant to export to FDI. But India actually exports much more FDI as a share of its GDP than China does.

Now, not only is that the case, Chinese FDI is mostly – a lot of it is resource-based to Africa. So, I call that pretty normal FDI because it’s downhill. It goes from rich countries to poor countries. Indian FDI is what I call uphill FDI. It goes from a poor country. A lot of it goes to the advanced countries, which is not meant to happen, and it goes in highly-specialized and skill-intensive sectors. So, this was not meant to happen in the way we talk about the world economy, but this is what is happening in India, which is that, you know, this is very, very unusual. It shows that India has actually comparative advantage in some of the things that the advanced nations have like skill, entrepreneurship, and so on.

So, having said that India’s – these are all aspects of what I call Precocious India. There are other dimensions of India, which we can talk about, in which either India is different or not so different from your average developing country. I don’t want to spend a lot of time on that, but I’m sure people will be interested.

You know, unlike China, we have a domestic demand-based model of development, not an export led-based model of development, but that’s not particularly precocious. I mean, some poor countries do that; some richer countries do that. But it is different – India is different from China.

And also as a share of – you know, in terms of integration, India is much less integrated than China, although it’s been growing very rapidly, and India found out in the global financial crisis that it, too, was much more integrated on trade and finance than many countries. But then, many people in India believed it still lags China’s substantially.

On the social indicators, India is actually not very bad on inequality. For its level of development, India is much less unequal than, say, China is. It’s about par on life expectancy, you know, given what India’s development – as it should be – and it’s horrible on child malnutrition. I’m saying all these things because, on these social outcomes, there is no consistent pattern about India. You know, it’s good on some, not so good on others, and good on others. But these are just general characteristics, not characteristics of a Precocious India. This is kinda – I’ll skip this. We can come back to that later.

So, I think there are two major near-term challenges, which is that at the moment, India is, macro-economically, very vulnerable. It’s vulnerable because, amongst emerging market countries, it has the highest and most persistently high inflation. Inflation has been at, above, or close to double digits for two years or more. It’s external position is becoming more vulnerable and it has very high fiscal deficits. I mean, these are the macroeconomic vulnerabilities that all of you have been reading in the press for the last, I would say about, almost six to eight months because the rupee has been under pressure, foreigners have been fleeing. And the second – which leads to the second challenge – which is the slowdown in growth and, you know, I’m going to talk about that in a different context.

Now, inflation is very high. I can give you all these charts. The really interesting thing about India is that its aggregated deficit – aggregate fiscal deficit – I consolidated states and the federalist level – is about 8 percent of GDP, which is very high; almost U.S. levels of fiscal deficits. And the – really, I think the point I would make on the fiscal deficits was it was a tragedy, almost a policy catastrophe, that in the years of high growth, when India is growing at about – shh.

Male Speaker: [Inaudible].

Arvind Subramanian: I’m terribly sorry. The catastrophe really was, I think, in the rapid growth years, growth was very high. Interest rates were very low, and yet, we didn’t consolidate sufficiently. That was the major policy error on the fiscal side.

Now, the way I put – now, I want to go to, you know, the growth challenge I think is the most interesting picture here. That, in some ways, one could argue that, in the last two to three quarters, India’s growth has slipped from the Chinese style 8 to 9 percent, to about 6, 6.5 percent. And so, the big question in India is, “What’s going wrong? What’s going wrong?” You know? “How do we respond to that?”

And one could make the argument that, in fact, as – that in fact, the 8 and 9 percent of the boom years were the aberration, and that in some ways, India did not deserve to grow at that, given all the things that India hasn’t done. Because here’s something really important to remember: that if you look at any measure of reform – policy reform, any measure of – policy reform for India and China, either in absolute terms or in changes across time, India and China are laggards. The countries that did the most policy reform are those in Africa and in Latin America. And yet, China and India grew much more rapidly than all these countries.

So, I wanna be careful here. It’s not that India and China did not reform, but the magnitude of the reform and still how controlled and closed their economies are. No comparison between China and India, and all these other countries, so that’s why – which leads to my, you know, proposition that maybe India didn’t deserve to grow so much in the first place. So, the puzzle is not why India is slowing down, but why India grew so rapidly in the first place. And the fact that we have high inflation in India could actually be signaling that supply capacity in India is actually not keeping pace with demand.

Now, I would argue – and this is why I’ve spent a bit of time on the Precocious India Model. One could make the case that this is because India’s Precocious Model is unsustainable. And what do I mean by that? We have developed based on skilled labor, which is actually very scarce. You know, this myth that India has a lot of skilled labor is just not true. Skilled wages have been growing in dollar terms at about 14, 15 percent for 10 to 15 years, and we have a completely dysfunctional system of higher education, which just does not elicit the supply that the economy needs.

So, the fact that we use intensively is – you know, running into capacity constraints. What we have abundantly we don’t use because of the labor laws and other rigidities, which we never used, and there’s very little change going forward that we’ll be able to use it. And then, we have a situation where, you know, scarce social capital – you know, we call them public institutions, call it governance, call it corruption – whatever. That is actually getting eroded progressively. You know, the big governance problem of India – which is an important input into development – that is being undermined through corruption and criminality.

And, of course, what is happening is that land, which is meant to be a relatively abundant factor of production in India, has now become the locus of corruption in India so that, you know, we have a situation where, if you take these four factors of production from a development perspective, what we are using intensively is – we’re running out of it; what we don’t use intensively, we have abundant amounts of it; and, you know, important governance and land are becoming real sources of corruption and a problem.

So, you know, this is a chart that people have been using a lot because I put it up as a blog post. If you look at power losses in India, which is kinda – which is a kinda a metaphor or a proxy for not just what is wrong with the power sector in India, but governance more broadly, you know, India is – this is a measure of transmission and distribution losses as a percentage of output and India is way above any emerging market country. This was on Ezra Klein’s blog as well. You know, India is about five to six times as inefficient and corrupt or weakly governed in power than China is, or even Brazil and South Africa. So, this is, in a way, a kinda metaphor for the governance problems in India.

The way I like to put it is that, you know, the medium-term challenge is actually – one can summarize it kinda in terms of two teams. We have fiscal populism, i.e. the notion that over the last five, ten years, that we need to give away goodies and freebies in the form of subsidies. You know, we have oil subsidies, food subsidies, power subsides, fertilizer subsidies, and in the last about seven, eight years, the government also instituted a rural employment guarantee scheme. So, the notion that fiscal populism is an electoral vote-winner in India is very – has – it kinda has a lot of hold, attraction in India, and that’s a big problem. That’s contributing to, certainly, the macroeconomic challenges of India.

But then, I think what is also happening, from a growth point of view, is – I call this – we’ve moved from one of India’s great statesman who you may not have heard of, a man called – from my part of the country called Chakravarti Rajagopalachari. He said India was a permit-license quarter Raj, you know? He just did not like the Nehruvian Model.

But I think, now, some of those things have come down. We have become, I think, what’s called a rents Raj and, you know, in a piece that I wrote, I said kinda facetiously, “There are three kinds of rents: ethereal rents, spectrum allocation –” absolute disaster and a big source of corruption. The biggest scandal India has ever had was ethereal rents. We have terrestrial rents; land has become a source of corruption. The allocation of land is a big source of corruption now – the biggest source of corruption – and that comes in the way, for example, of extracting coal, which in turn, affects power, and infrastructure, and growth indirectly. And then, of course, we have subterranean rents, which is the whole coal phenomenon in India where we cannot get access to coal because the mining rights, again, are really a disaster.

So, in the medium-term, in some ways, fiscal populism and this rents Raj is a serious impediment to growth in the medium term. But then, you know, you wake up and say, “Well, there is the other side to India as well.” And I can make a case – “How can you keep India down?” You know, i.e. that India will actually grow at about 8 to 9 percent over the next 20, 30 years.

And what are the counterarguments? I mean, I think a simple counterargument – one of them – is that India is still, actually, very, very poor. It is at about 8 percent of U.S. per capita GDP, and so, the scope for catching up the economic frontier is just enormous, you know? You have to do very little to actually be able to grow rapidly, and maybe India has crossed that threshold of having done the minimum, and you have a big market, and so on. So, you know, maybe we will have rapid growth going forward.

Everyone talks about the demographic dividend, which is, you know, a source of dynamism in terms of labor force. And then, I think, what is happening in India is that, although there have been no reforms in India or no serious reforms, the way the Indian economy is doing – has been doing well – is because of what I call a Growth Begetting Growth Dynamic. You know, because India has somewhat managed to grow for – what – 15, 20 years, suddenly becomes a very attractive place.

And, you know, my favorite example is that if you look at elementary schools in India, teacher absenteeism is, on average, about 50 percent; 50 percent of the time, teachers don’t show up in public elementary schools in India. But what has happened in the last ten years is that because of growth, the demand for education has risen so rapidly that even in these rural areas, private schools have come up. Not the best solution necessarily, but in fact, exactly in those districts and states where the public education system is the most dysfunctional is where you see the most rapid rise of private schools in India. So – and that’s a response to growth itself; it’s not that, you know, there have been independent reforms, but growth begets reforms.

And I think, finally, what I really think is where the promise for India lies is two-fold – is this combination of the dynamic of competition between states. You know, take power, for example. Very bad on average, but some states are doing very well – Gujarat is the most famous example – and that creates both a demonstration effect, and capital and labor move in a way that puts pressure on other states within India.

And – but it’s not just that there is this dynamic of competition, but that is increasingly being combined with, I would call, the most heartening phenomenon – is that politics at the state level is responding to economic governance and economic delivery. And so, in the long run, if politics – democratic politics – could actually reward good economic governance, that is India’s hope.

Now, my – you know, Indians are very wistful about, “Oh, we wish we could have Chinese centralized decision-making authority.” I say that’s nonsense because I believe in the Donald Rumsfeld rule that, you know, you go to bat with the political system you have; not with the political system you wish to have. India will never have the Chinese political system, but if, through democracy itself, we can overcome some of these economic governance problems, that is India. So – and in the last two to three election cycles, you see more and more broadly, good governance being rewarded by – through reelection at the state level, and there are many examples which we can go into.

So, you know – and all that translates into the fact that India is a nation of hustlers, so the private sector is doing well. Skilled labor is in scarce supply, but, of course, you get this endogenous response of skills. You know, maybe unskilled labor – there’s a demographic dividend we’ll come by. Maybe – you know, even in terms of governance, if you find this responsive politics, maybe some of this can be partially overcome. We have a vibrant civil society in India, and so, that’s kinda the positive spin on the medium-term challenge. I am completely agnostic about, you know, whether I believe in the pessimistic view in India or this thing. We can talk about that in the discussion.

I want to end – you know, I think I’m still within my time limit – speak about the long-term challenges. I think – I mean, I’ve alluded to this so far. I think what – I think there is a race between rot and regeneration, and I don’t know which one is going to win. I can tell you all the reasons why economic governance, economic institutions, political institutions are deteriorating in substantial and very disturbing ways, but I can also give you examples of regeneration happening and the whole democratic responsive politics.

So, again, as I said, I’m a little bit agnostic, but I think, in some ways, this is the big long-term challenge. If politics can respond, then there is some chance of overcoming what is a serious deterioration in economic institutions.

The other way to think about India, you know, in a very kinda broad picture-sense, I think India – you know, the historian Ram Guha says that, you know, “What is unique about India is that we have many, many more axes of difference and discord than your average developing country.” You have the class axis, but that’s common to many, many countries around the world. And I know, it’s true that, you know, this is getting – inequality is accentuating this source of discord. But that’s not very interesting because, you know, I think many countries have that; we can talk about the inequality problem.

But I think if you look at the other axes, language was an axis of discord, especially in the early years. I think India has, by and large, overcome this problem. This is not a serious issue any more, so that’s a plus check for India.

Caste – horrendous axis of discord, you know, historically, etc. But I would make the case that, amongst these axes, at least India is finding a way of overcoming this because – simple. Electoral politics and numbers means that the backward caste have acquired caste have acquired political power – lots of cost to this, but they also found economic opportunity. They’ve found just a lot of subsidies and so on, but they have found a way of overcoming – partially – all the baggage that was put upon them by the historical, the hideous historical hierarchy in India of caste. You know, most famously, they’ve acquired political power in Uttar Pradesh for many years, also in Bihar. So, just the numbers have worked in their favor. And while I don’t mean at all to suggest that the caste problem in India is over, all I’m saying is that I can see that, you know, the water level in this cup is rising.

I think the two axes of discord we haven’t solved is religion and what I would call, you know, the geography and the tribal problem. If you look at indicators, I think the Hindu/Muslim problem, I think the economic – economically, I think, you know, the backward caste, the [inaudible], are seeing improvements in their standards of living, opportunity, and so on. We don’t see that to the same extent for the Muslims in India and I think that is an axis that I think is a potential source of problem always in India.

And, finally, I think, you know, the big one we haven’t cracked is the tribal problem. I call it the kinda geography axis because most of these people live in a heavily-forested band in Bihar, Jharkhand, Chhattisgarh, Orissa, Andhra Pradesh. It’s kinda a band in Eastern India where they’re basically tribal. They’ve actually not participated in the market economy and, of course, it is the hotbed of Maoist insurrection in India, you know? And that is a serious source of security risk for India because people don’t realize that the writ of the Indian state does not run in this part of India. So, what – 75 to – 20 to 25 percent of India, the writ of the Indian state does not run. And, you know, these people are marginalized, out of the system, and therefore, always a source of problem for India.

Now – and I think there’s really – there is – you know, I had this big – the security angle, the whole South Asia regional angle, and I’m not an expert. We can come back to that, but I do think a big long-term challenge is resources, especially land and especially water, which is becoming scarcer and scarcer, and so, there’s a whole geopolitical angle with China on this. There’s the climate change angle. I think water is going to be a real source.

So, let me end by saying that, you know, you can wake up on any one day, and put on the optimistic hat about India or the pessimistic hat about India. And I usually end talks on India with my favorite quote from this great book by Wendy Doniger called The Hindus and she says, “Every –” so, I think India is like a Sanskrit word. And apparently, every Sanskrit word means itself and its opposite. So, John Robinson famously said of India that, “Everything and its opposite is true about India.” So, it’s like a Sanskrit word. Everything and its opposite is also true about India. But every Sanskrit word also represents a god and a position in sexual intercourse. So, that, I think, in some ways is what I think about India that, you know, it is both itself and not itself. Thank you very much.

Shuja Nawaz: Thank you very much, Arvind. As advertised and as promised, I knew you would deliver. It’s a very provocative, wide-ranging talk and I’m sure there are going to be tons of questions that I’m sure you will have answers to.

I’m just reminded, after your last few comments, about whether the glass is half full or half empty, of the way a very dear friend of ours, Sir Hilary Synnott, who used to be Ambassador in Pakistan for United Kingdom and High Commissioner, once described when he was talking about Pakistan. When we were discussing the future of the country and he said, “It’s not a question of whether the glass is half full or half empty; the question –” and he used his engineering background. He said, “The question is whether the glass is too big.”

Arvind Subramanian: Right.

Shuja Nawaz: And so, I’m wondering the glass in India is growing too fast to keep up with.

One of the points that you mentioned at the beginning was the fact that India has relied on a domestic growth model rather than an export-led growth model, which is what the international organizations had been purveying to the world, particularly the developing world, for decades. And I’m wondering. What do you see as the one or two key elements in that? Will there need to be a greater infrastructure investment? Will there need to be an opening up to foreign direct investment in the Indian economy? And then, what are the prospects of these?

Arvind Subramanian: Should –?

Shuja Nawaz: Yes.

Arvind Subramanian: So, you know, India as shown that – you know, India, a country, can grow rapidly without being a manufacturing, export-led model. I think the big difference between India and these other countries has been, as I said, that we’ve used skilled labor; we’ve not manufacturing exports as much as services exports, but by and large, it’s not been based on foreign direct investment and not been based on a heavy reliance on foreign markets.

Now, I think that this model is sustainable. I mean, I think going forward, it’s not the case that we necessarily need lots of foreign direct investment and so on, but I think – let’s take infrastructure, which is actually a good example, and take power in particular.

Now, it bothers me that routinely people say, “Oh, India’s needs are – India needs 500 billion in foreign resources for the infrastructure – in resources for the infrastructure sector and that most of it has to come from abroad.” I don’t agree with that because, for one thing, China has shown that, you know, all its infrastructure has been in the public sector and it’s not been based on getting foreign savings. China has got foreign direct investment in manufacturing, but in the infrastructure sector, it’s basically been domestic. Now, the reason I get a little irritated with that is because one plays into this conventional Washington consensus view that, you know, “Oh, we need more globalization and more foreign direct investment.” When, in fact, the problem of infrastructure and especially the problem of India, is simply a governance problem.

I mean, let me make it very, very simple. That, you know, people don’t pay for power in India; that’s the bottom line. And if people could be persuaded to pay more, private investment, domestic and foreign, would come rushing in. And, at the moment, you know, when foreign direct investment comes in, they need guarantees because people don’t pay, and then, our state laxity boards are very badly run. We had the whole Enron problem where the guaranteed returns were given and the whole thing blew up because of, you know, all the problems with Enron.

So, I think it’s basically a domestic governance and a political problem where the whole – the notion that every politician of any stripe, routinely, the first thing he will promise when he gets elected is free or subsidized power. And the conundrum is this – that why is it that people buy this promise? Because the history of this promise of free and subsidized power is a history of no power and interrupted power. So, why do – you know, why does politics not change?

And, as I said, the opening that I see now is that as more and more states like Gujarat, and Himachal, and Tamil Nadu to some extent, as they start delivering power with payment and – people then say, “Well, it’s a much better model.” And, in fact, one of the really interesting experiments in Gujarat now is there are two – farmers have the choice of two sources of power: cheap power, no guarantees on reliability; more expensive power, guaranteed. And we shall see and I think it looks like more and more farmers will opt for the latter option.

So, coming back to your question, I don’t think it’s globalization and inadequate globalization that’s holding back growth infrastructure. I think it’s fundamentally a political and a governance issue, the solutions to which are entirely domestic.

Shuja Nawaz: Arising out of this is – a lot of people say that India has an insatiable appetite for energy and it’ll need every ounce of energy that it can get. Particularly in the near to medium term, if India is unable to make this shift in governance that you are suggesting, is there a possibility of taking a regional approach? Having a very different set of relationships regarding water, power, with its neighbors all around, not just to the west, not just to the north, but to the east as well?

Arvind Subramanian: I think that’s an excellent point, Shuja, because I do think that on energy and power, I think apart from whatever India needs to do domestically – just to give you an example, the fact that we have power subsidies in India has meant that the water table has basically – is dropping tremendously. And I do think that a regional solution, which both to China’s – India’s north and to India’s west, i.e. Pakistan, China, you know, Sikkim, and all the countries there, I think one has to have a regional solution, I mean, for two reasons.

One, of course, is that China controls the water table and, increasingly, it will control the water table when water is becoming scarce. So, I think that element has to be – and then, the other element, of course, is that many of these states, including Pakistan, have a big potential in hydro-based power, which I think India should use and substitute for its own coal-based. So, both for the climate change problem, for the regional security problem, and for the water problem, I think we need a much more regionally-cooperative solution to this problem.

Shuja Nawaz: Thank you, Arvind. I’m going to open it up to the audience and I request you to be patient. I will recognize you as I see you, and if I miss you, please, be patient with me. Please, wait for the microphone. Identity yourself, and then, ask your question. Can we start here, please?

Teresita Schafer: Thank you. Teresita Schafer from Brookings. I wanted, actually, to extend the first question that Shuja asked about the appropriate model for India’s future economic growth.

You suggest that the Precocious India Model may not be sustainable. I think, reading between the lines of your presentation, you also suggest that the conventional model, where you start with agriculture, and then, graduate to flip-flops and textiles, may not be adequate for a country of India’s size. Although, textile certainly has been an important sector.

Are we looking at a time when India is gonna need to experiment with different approaches? Or, perhaps, more fundamentally, follow the logic of what works in an economy where the private sector has already begun doing more, and use that to drive India’s future development, while concentrating on things like governance and education?

Arvind Subramanian: So, Teresita, I think I would separate your question into two parts. One is this whole private-sector-versus-government-led model of growth, and the other is more the kinda skill-based-versus-unskilled-based model of growth. I think these are two analytically distinct questions and they both are extremely – very important and very good questions.

Let me take the latter one first. My view is that India has adopted this unusual Precocious Model for a number of historical policy choices, you know, that Nehru made and so on, right? Would it be desirable to go back and use our unskilled labor more intensively? I think, undoubtedly, it would be because I think that’s where the needs are, employment, and so on.

Is it going to happen? I don’t think it’s going to happen because the pattern of specialization is like a Titanic; it’s not easy to change that. And just to give you an example, routinely, now, if you go to manufacturers in India, you will find the situation where they’re thinking of substituting robots for unskilled labor. And you read Ed Luce’s book, there are several examples of that. So, much as I think it would be desirable to accommodate unskilled labor, I just don’t think – as a matter of history, and hysteresis, and persistence – that’s going to happen.

The sad, unfortunate, and unsaid tragedy of that is we’re going to persist with the skills-based model of development and, hopefully, India’s skill level will catch up. But the consequence is that a number of one or two cohorts of unskilled labor will not benefit from the opportunities of growth; that’s just a sad and inevitable corollary of this pattern of development.

So, my urge or plea would, therefore, be that of course we should improve our labor laws to encourage hiring of unskilled labor, but given a choice, I would focus much more on getting skills upgradation in the economy, improving our higher system of education, because that’s where the demand is going to be going forward.

So, that’s on the economic analytics of this; on the other private-sector-versus-market-based model, the government-based model of development, here’s my slightly controversial take on this. I think people forget that growth requires a healthy public sector, which performs all these basic function, and a dynamic private sector. India has achieved, or is in the process of achieving, the latter. The private sector is very dynamic.

The problem is that the public sector is a drag on India. The reason I feel pessimistic is because I feel that, in the long run, history and experience – the history of economic development teaches us that it’s much easier to create a private sector than it is to create and maintain an efficient public sector that delivers basics – the basics of maintaining law and order, the basics of maintaining property rights, the basics of stabilizing the economy, and the basics of legitimizing the economy via transfers, etc., etc.

These are all very demanding attributes, but very important attributes. Western Europe and the United States took a long time, but they achieved that, and that is, in some ways, the basis of prosperity. I often say that, you know, there’s as much entrepreneurship in Soweto or Mumbai as there is California. That’s not the problem. If you read Kate Boo’s book on the Mumbai slums, there is no dearth of markets. There’s markets for flesh, for, you know, waste, you name it, but we don’t want to live in the Mumbai slum because the basic infrastructure that governments provide, law and order, etc., is missing in Mumbai. So, that – and I think that is eroding in India and it’s much more difficult to reverse. So, that’s where we stand. The private sector will do very well in India, no problem. I have no problems about the private sector at all, as it will do well in any part of the problem, but it’s that basic provisioning essentials that the public sector has to provide that, I think, is a much more source of worry in India going forward.

Shuja Nawaz: It’s interesting. In my visits to both India and Pakistan, when I’ve talked to entrepreneurs, the one thing that they say in both countries is that whatever they’ve achieved, they’ve achieved in spite of government, not because of government.

Arvind Subramanian: Right.

Shuja Nawaz: And they want the government to step out of the way.

Arvind Subramanian: But sure, you know, I think that that – you see, I – to be totally candid, I find that a little bit, you know, self-serving what they say because they rely a lot on what the government does and does not provide. And if the government does not provide social stability, for example, or law and order, you know, these guys are not going to last.

So, I think that’s exactly the kind of discourse and conversation that, I think, bothers me about what’s happening in much of the region. That you say, “Oh, government is the problem.” Yeah, sure, government is the problem. Of course it’s been a problem, and in the past, government has been overbearing and over-intrusive, but the response to that is not that government should get out of the way, but, you know, government, as Teresita was implying, should do a few things, but do them really, really well. And in India, that’s not happening.

If you look at the judicial system, for example, the backlog of cases in the state courts are 30 years, you know?

Shuja Nawaz: Thank you. We have a question here.

Surjit Mansingh: Thank you. On this issue of governance, which I agree is the key issue in India today and tomorrow –

Shuja Nawaz: – Could you identify yourself for the audience? – Oh! I beg your pardon.

Shuja Nawaz: Please.

Surjit Mansingh: Surjit Mansingh, American University. Wouldn’t you say that the discourse within in India today is, in fact, focusing on these things? That there a lot of people – I can name them; they’re friends of mine – who are recalling the provisions of the Constitution, who are recalling what was achieved by government in the 1950s, in the face of enormous tragedies and challenges.

And so, as you pointed out in your talk, the demand for good governance is growing. And I agree with you that the whole discourse on private versus public – I mean, one only has to go back to Polanyi.

Arvind Subramanian: So, see, that’s why I think, you know, I say there is a race between rot and regeneration. I think the rot, one can see. I think the regeneration is partly because of what you said – that, you know, the demand for governance is a superior good. The demand for governance increases as people become richer and demand more.

I think the other reason for being hopeful about regeneration is that, you know, the fact that India is so open and transparent, and you have really vibrant [inaudible] society and press, that at least the more egregious – the problem is that all these things come to light, but nothing is ever done about them, you know? Enforcement never happens in India.

So, I think there is a lot going on, and as I said, as more and more good governance gets rewarded – so that’s, I think, the regeneration part. But, as I said, both are happening in India.

Shuja Nawaz: I’m sorry. I missed the lady in the back. So, we’re gonna get to her and I’ll get to all the others that I recognize, not to worry.

Polly Nayak: Polly Nayak, independent consultant. I wanted to ask two questions. One is, “To what extent do you think the export of investments by the high-end Indian companies is a function of push rather than pull?” Obviously, they calculate their relative opportunities in economic terms, but to what extent is there a governance issue here? It makes more sense for them. It’s more secure and predictable in other venues – because that’s been going on since the ’70s with some of India’s best corporations. Arvind Subramanian: – Right.

Polly Nayak: The second part of my question, which relates to governance is, “What role do you see for popular anti-corruption movements in the transformation or – we hope – future transformation of governance in India?”

Arvind Subramanian: See, again, both excellent questions. On the export of FDI, it’s true that – you know, and this is something that’s actually happening to a similar extent now in China where, you know, because of uncertainty about the domestic regime, the notion that capital is fleeing as kinda insurance and push. I think it’s only partly true for India because the period over which this actually surged – this phenomenon – was the period in which India was growing rapidly and foreign capital came flooding into India.

So, I think what this export of FDI – until recently – I think now, things are changing to some extent because of all the uncertainty in India, but until very recently, for over a ten-year period, most of it was because Indian entrepreneurs and Indian management showed that they were capable of running world-class companies, not just domestically, but internationally.

So, I would say that the push factor has been relatively muted until recently, and therefore – on the popular anti-corruption movements, see, I am not an expert on this and this is certainly above my pay grade, but I think the pattern is that – I think what – I mean, the fact that there’s so much mobilization and consciousness-raising, I think, is unambiguously good. The point is, “How does it get channeled subsequently?” and that’s always been a problem, even with the latest – the Anna Hazara movement – the whole thing, you know? The fact that we don’t actually see the concrete manifestations of that is a bit discouraging and, you know, the fact that now he’s started a political party, people are not very sure that that’s the way forward.

So, I often say that, in India, you get episodic accountability. You don’t get ongoing accountability in India, and these movements give you those episodic bouts of accountability, but I wish it would get translated more into basic structures and institutions changing in a way that we get more ongoing accountability.

Shuja Nawaz: Thank you. Question here?

Walter Jurešić: Good morning. My name is Walter Jurešić. I am member of The Atlantic Council. It’s quite interesting debate. I wish I could have more time with you to discuss.

Arvind Subramanian: Sure.

Walter Jurešić: The question for you is – question and comment. Global village and corporate control, and then, you mentioned many times segregation between skills and unskilled workforce. Why we have to concentrate on that? Because I do not believe it. Every individual have some kinda skills, so we should go to the transition from unskilled workforce to skilled workforce. Not everybody is going to go to college, obviously, but maybe on their own they will have an interest to go to college.

And the other comment and question for you: why we cannot create stronger private-public partnerships in those country, including India, which is very critical? Thank you.

Arvind Subramanian: You know, I mean, I don’t wish – mean to, in some ways, say that, you know – make a kind of judgment about skilled is good and unskilled is bad. I just think that the way the modern economy functions and the way that India’s shape of an economic state has traveled that, you know, we – the demand in the economy is for skills, not that much for unskilled people. So, the question is, “How do you address that?” I mean, it’s just a practical question. How do you address that?

One way is to do what the East Asians did and what China did, which is to actually – you know, the pattern demands more unskilled labor, which is actually what the country has in abundance. In India’s case, that’s not been the case. So, as I was trying to say earlier – that the choice is, “Do you make the ship of state move – turn around and move towards unskilled specialization? Or do you upgrade skills?” And, I think in India’s case, I think one will have to upgrade skills.

But it can’t be done easily. It can’t be done easily, and the same governance problems we have in the infrastructure sector, we have in the higher education sector. So, skills upgradation and higher education is not easy to do, either. So, that’s, I think, a dilemma and there’s no kinda value judgment about skilled and unskilled this at all.

You know, all public-private partnerships – it’s become one of these terms that – you know, or things that – it’s become almost a fad, you know? I don’t really know what it means. What does public-private partnership mean? Every thing – every damn thing is – every economic activity – is a public-private partnership.

You know, and in the Indian case, essentially, what it’s become, especially in the infrastructure sector, is basically the government saying, “Look. We’ll give you land, and we’ll look after the land problems that we have, and the rest is yours.” Now, if that’s a way of going forward, I’m all for it. But frankly, in the Indian case, that’s not been that successful because the whole allocation of land has become such a source of corruption that, sometimes, you wonder whether, you know, this is desirable in the first place or not. So, I’m all for PPP or whatever that means; I just don’t know what it means.

Shuja Nawaz: In many ways, this is the government wanting to continue the rent-seeking. So –

Arvind Subramanian: – Exactly, yeah.

Shuja Nawaz: – keeping its hand on the tiller and in the till.

Arvind Subramanian: Exactly.

Shuja Nawaz: So, maybe that’s the way to describe it. The gentleman in the striped shirt? I’ll come to all the others also. Please, don’t worry.

Muneer Sheikh: – Good morning. I’d like to draw your attention –

Shuja Nawaz: – If you could identify yourself, please.

Muneer Sheikh: Yes, my name is Muneer Sheikh. I’m a ex-Executive Director of Electricity Regulatory in Pakistan. I’d like to draw your attention to the electricity sector. A blackout is on everybody’s mind. Was it an accident? Was it expected to happen? Worked in the region and knowing about the electricity problems in India, I knew for a long time the integrity of the electricity grid was an issue. There were large frequency oscillations from getting the power from east to the west and it was alarming.

And so, where do you – if you were to – there was a need for infrastructure development to support the high-voltage network and it didn’t happen. Where do you assign the blame or where you think the problem occurred? Looking back at the California power crisis and New York power crisis, we find out that it could have been easily fixed and there were some problems; we just never paid attention to it. So, could you, please, comment on the blackout in India?

Arvind Subramanian: Firstly, you know, I’m not an expert on the technical aspects of the power grid in India, so what I’m going – I mean, what I – I don’t have much to say by way of – I only know as much as you know in terms of the proximate causes for this problem, which seem to be that some states overdrew because of the drought and because of the fact that the water table had come down. The monsoon has kinda partially failed this year, so the demand for power had gone up, and the supply of power had come down.

And, clearly, what had happened was the governance problem comes back here in the sense that, you know, technically there are limits on how much each state can draw on the grid, but clearly, those were flouted and those were flouted probably in connivance with public officiants. And then, that must have set off the trigger. So, I don’t – apart from – that’s all I know and, you know, I don’t know very much more about the power sector in India.

To me, the much bigger problem – you know, as, actually, Shuja was saying while we were talking, I mean, the amazing thing was it got fixed so quickly, you know, compared to the Pepco problem that we saw – I didn’t have power for five to six days. But that, I don’t think, is the real issue in India. The real issue on power is the chronic under-supply and governance. And I think that is the bigger problem of power in India.

Shuja Nawaz: Thank you. The gentleman in the white shirt over there?

Male Speaker: Yes, I am Dr. [Inaudible] with the [Inaudible] American League. The answer was very simple to the power shut down. Just say it was a conspiracy and that will be much easier for you.

Anyway, the – you mentioned so many things. It was very enlightening for me. How far, successfully, India is managing its population? Because the pressure – population pressure on the infrastructure can become very burdensome and it gives tremendous difficulty to a nation to take off.

And the other thing is, “What is the number of people [inaudible] in India who are below poverty line?” And the nation’s security is nothing but the reflection of your economic strength. And the defense budget of India, if the policy of reconciliation and resolution of issues with neighbors is adopted, and India reflects a softer image, won’t it be very helpful, then, diverting money resources to improve the quality of life, living conditions, and future of their future generations? Thank you.

Arvind Subramanian: Let me take this in order. Population pressures – you see, you know, the world over, there’s been a big shift in the conversation on population, right? That, in the ’60s and ’70s, we spoke about population being a problem, and then, you had Family Planning, birth control, all these things. And then, suddenly, with the East Asian miracle and thereafter, the whole question became, “Can a certain structure of population actually be a source of dynamism?”

So, the focus was shifted from the level of population to the structure of population, and that’s the sense in which, now, people are saying that India has a demographic dividend ahead of it because it has a young and growing labor force, which will save more, which will keep India competitive, and that’s what happened in East Asia. That’s what happened in China, and now, next to happen to India. And conversely, aging is a burden, you know, even though you may have a smaller population; but if it’s an old population, it’s actually a problem, and that’s what looms ahead for China.

And I think – in India, so we have this same situation where I think that, going forward, I do believe now that there’s a huge source of buoyancy coming from India’s – the fact that it’s going to have a younger population. But that is as much a statement about potential; it’s not a statement about what’s actually gonna happen because the fact that you have the capacity for dynamism doesn’t mean that they’ll have the opportunities to actually fulfill that. So, I think the government still has a big challenge ahead to convert opportunity into – capacity into action, you know, jobs, and employment, and so on. But, nevertheless, I do think that it’s a source of pressure – it’s a source of dynamism.

The other thing that’s not recognized about India is that India is, actually, very, very different demographically within India. Kerala and many southern states are now, in fact, heading towards aging. You know, much of the demographic they’re growing is going to be in the hinterland, you know, Bihar, Madhya Pradesh, Uttar Pradesh – which is the most populous part of India – is what is going to generate the biggest increase in this young population, and the other states are actually going to start aging soon. So, India is a very interesting mix, even in terms of demography.

Poverty – I mean, the two things I would say is that, you know, India’s poverty has come down a lot. It’s a very controversial subject – the numbers. I would say something like the current estimate is something like about 20 to 25 percent of India is under the poverty line, which used to be about 50 percent in 1983. It’s a substantial reduction, but it is not as big a reduction, given how much India has grown and given comparable experience in China. So, India has, in that sense, lagged behind. And the experience of the ’90s and the 2000s has been not as good as the experience of the ’80s when, actually, poverty came down much more because it was much more agriculture-based.

On this whole, I think, defense and development question, I mean, I think in an ideal world, yes, you know, if all countries could do – could convert swords into plow shares, everyone is better off. But we don’t live in the real world and, you know, there’s the whole question of, “Well, what is the external environment? What are the biggest security issues in the region?” And, also, “Can you do this unilaterally or can you do this –?” whether you have to do this in concert with other countries.

I mean, I would certainly be – you know, because, for example, he problem in India – just to be a little bit controversial – is that, in India, the big strategic thinking is now – on the defense side is – about the threat posed by China and the need to kinda keep up with that. So, I don’t suspect – I don’t expect Indian defense spending to decline over the next few years; quite apart from the India-Pakistan issue, you know, which is – has its own history and baggage. The big question is whether China is increasing its defense budget to rival that of the United States, and therefore, you know, there is going to be collateral effects on India. And so, India is going to be, I think, trying to match China. So, I’m not optimistic about – much as I would think, I would hope, that that’s the way all countries would go, I don’t think India will go in that direction.

Shuja Nawaz: Thank you.

Robert Dohner: Hi, I’m Robert Dohner from the Treasury. I agree that governance is really important, but I think it’s a decades-long process, and as much an output of growth and development as an input. We’re all in the policy business and I wonder if you’d talk a little bit about what importance you think episodes of policy change have in spurring growth and also retarding growth in India. And if policy episodes are important, what is the scope for policies that could lead to sustained growth over a reasonable period of time?

Arvind Subramanian: You know, since you’re from the Treasury, you know, let me be provocative – is that Montek Ahluwalia often says that, you know, “When U.S. –” often, even, for example, the IMF, the World Bank, and the United States, they go to developing countries and say, “Change the policy. Policy reform – very important.” It’s kinda what I call the Nike Approach: just do it. And then – but then, when you talk about equivalent reforms in the U.S.A., “Well, you gotta understand. We’re a very complicated political economy here. Congress is this and this is that.” You know, all those issues are raised.

And my response is that, in a country like India, those are absolutely and equally true in a country like India. So, while I do – I am a complete believer in the need for policy reform, I think, just as you said, governance is endogenous; policy is also endogenous. Policy reform is also endogenous.

And the way I think it happens is, you know, democratic politics has to make policy reform electorally popular and positive. And I think, you know, to some extent, it’s happening in some parts of India. But to some extent, it’s not happening.

So, I take the view that – just as you said – governance is endogenous. I think politics – or to put it differently, the degree of maneuver or the degree of maneuver for leaders in India to kinda unilaterally and kinda just from top-down institute policy reform, is not as great as outsiders might think. And that’s, I think, the understanding that people will have to have about a country like India, or even now like China, you know? Much as it’s much more top-down, centralized decision-making, even China is now subject, increasingly, to publici opinion and so on. So, I think it really is a complicated business, policy reform, or at least it’s as complicated in India as it is in the United States.

Robert Donher: Okay, well, I’ll be provocative in return.

Arvind Subramanian: – Okay, yeah.

Robert Donher: I mean, there are countries where growth accelerates and there are countries in which growth slows substantially. I’ll go out on a limb and say that it seems to be associated with episodes of policy change and the real question for all of us in this business is, “How do you get there?” I mean how do you get to a period where you raise the growth rate, development rate, and sustain it over time? And what are levers? It may be that policy is endogenous, but if it is, then I really despair of your ability – one’s ability to change things.

Arvind Subramanian: I mean, again, I said – I – there is no doubt in mind that, you know, policy reforms are associated with a faster growth. I think that’s unobjectionable. You know, the question is, “How many independent levers do leaders have to pull?” And you can either despair because of what is happening, which is – you know, and I think there is reason for despair, or you could say that – you know, you could take – as I was trying to say that, you know, as more and more states in India, more and more state-level leaders, start getting reelected because they’re doing better governance and delivering, that’s positive and I think that’s the source for change.

And the demonstration effect from that – so, there’s not only the demonstration effect from that, but India, being a common market, labor and capital can move. So, that’s, I think, the endogenous source of optimism in India, not this, you know, Washington consensus, Nike, you know, “Just reform, do it,” and you know, “Change this and change that,” you know, which I am less and less sympathetic to.

Shuja Nawaz: I think you’re pointing to the nexus between political science and economics now.

Male Speaker: [Inaudible] from India America Today. I came to listen to you and – because I – you know, you do point out some very thought-provoking things and, actually, my questions are based on what you said. You said notion of hustlers; I found it quite degrading because juggad is what – is in India is surviving on today, and that same thing would have been called here, innovation, and then, somebody would have patented it; and it’s just a way of looking it. So, is juggad not a form or regeneration instead of a rot?

And then, the second thing that got my attention was you, in a way, downplayed and ridiculed the role of Anna Hazare as when he flouted a political party. Is India not a democracy unlike some of its neighbors? And India cannot accept a man in the street making or proposing laws, so the man has to get into the political system. Thank you.

Arvind Subramanian: So, on the point about, you know, you don’t the like use of the term “hustler”, I mean, again, I was trying to use it in a completely descriptive sense because, after all, many, many people who use the same term to characterize, you know, the history of the United States from after the Civil War, to – you know, to about 1914. The U.S. was a nation of hustlers and that has both a positive side and the negative side.

And I think the thing to remember about juggad is that, you know, it is a response in a second-best world. So, that’s what – I think that’s the way you have to look at juggad – that, you know, ideally, they should not have reason to overcome all the obstacles placed by government or the environment, but given that those obstacles exist, people are creative enough to overcome them, you know? So, I don’t mean it in a pejorative sense at all; I mean, I think hustling is, you know, is a good thing. I mean, whatever – even though it may have some, you know, pejorative dimensions or aspects to it.

And I didn’t mean to downplay at all the Anna Hazare thing. I think it’s, you know – the nice thing about India is that, you know, if people want to form political parties, all power to them. My only answer was, you know, in trying to respond to whether I think it’s going to be effective, that’s my comment, you know? As I said, you know, “Great. We have this, but will episodic shedding of the spotlight on these problems be useful?” Yes, but it becomes sustainably useful only when it gets translated into changes in structures and institutions.

And, by the way, in all that I’ve said, I place all my hopes in democratic politics in India because that’s the only game in town, whether it’s policy reform or corruption.

Alessandro Pio: Thanks. Thank you for a very entertaining and illuminating presentation. On the topic of political reform –

Shuja Nawaz: If you could identify yourself –

Alessandro Pio: Yes, sure. Alessandro Pio from Asian Development Bank Office in Washington. On the point of political reform that Bob Dohner – policy reform that Bob Dohner was raising, I would say my experience in Asia has been that you see it happening more under two circumstances: so, in light leadership at a time when opportunities arise because you have growth and, therefore, you can make changes because everybody is benefiting; or at times of crisis when you need to have a response because the circumstances are such that you need to do something. So, I think those are, perhaps, circumstance – and I don’t know to what extent either of those circumstances would apply to India.

Two questions for you – one on the low labor skill. You seem to be somewhat pessimistic about the extent to which India can reap the demographic dividend. But, at the same time, the country is largely based on domestic demand and domestic demand would include expansion of manufacturing and services. So, there would seem to be scope for the lower level of skills to be employed in satisfying domestic demand. And the question there – to what extent do you see that possible? And to what extent – given the difference in demographics among states – can internal migration help redistribute the excess labor supply? Or is it such that structuring people – where you don’t move that much and, therefore, that doesn’t really happen?

The second question is more on the international dimension. You mentioned regional integration and how regional leaders can benefit, for example, integration of the electricity grid and other. At ADB, we have been strongly supporting regional integration and, in some areas – say, the Mekong region, Central Asia – we have seen success begin to develop. But I have to admit: South Asia is one of the regions where we see slower progress and more difficulty in regional integration. I would appreciate your views on whether that is also your assessment. And if so, what makes the South Asia region more impermeable or more difficult as in the area for regional integration? Shuja Nawaz: – Okay, thanks.

Arvind Subramanian: Just before I answer your two questions, I just wanna say that, you know, I would add a third set of set of circumstances when policy reforms happen. One is crisis; two is enlightened leadership; and third is, you know, the endogenous growth. You know, as I said, for example, growth takes off – the demand for education increases. Private schools come up. So, there is that dynamic as well.

Now, on – you know, on this low-skill, domestic demand migration, one of the things I have been struck by in the comparison between India and China is I’ve always thought of India as a place because – you know, because – in some of my – I was presenting something in London last year where Ram Guha and Suha Kilani were in the audience. I was saying, you know – telling them that I think the fact that one of the under-appreciated legacies of the old Nehruvian economics was the fact that once you establish the idea of India – right, i.e. that India is a political entity; there’s a national identity – what the one economic benefit of that is that migration becomes a much more politically-sustainable proposition.

People don’t realize that there’s this politician in Maharashtra, who’s [Inaudible], who’s kinda vehemently anti-Muslim. He began his life as vehemently anti-Tamil. He morphed into anti-Muslim much later because – I know because, when the Tamils used to migrate to Maharashtra, it was a problem.

But I think because the idea of India has been established, I think that’s less of a problem now and, therefore, migration as a basis for sustaining the growth model in India, I think, is part of my thing because, as I said, one of the ways in which good experiments travel or get replicated is when people move. And, you know, we saw that in agriculture – Biharis moving to Punjab – but now, it’s happening more and more.

But what surprises me is how little migration we’ve had in India compared to China. I mean, China has just been a churning factory in terms of migration, and that’s, I think, one of the under-recognized aspects about China. But I think part of that – my explanation – is that, in China, because growth rates were so rapid, that the prospects of such increases in standards of living overcame what are big costs to moving. In India, that’s only happened recently. When you grow at 4 or 5 percent, the attraction of moving is not that great, but when you grow at 9 percent, then the increase in standards of living that you expect to gain, offsets the cost of moving. And that’s why I think it’s slow to happen in India, but it’s happening.

On the – you know, South Asia is less – and I’ve seen study after study saying it’s less regionally-integrated than the rest of many other parts of the world. I think there are two reasons, you know? East Asia is integrated because they’ve all grown rapidly. So, when you grow rapidly, and most of your trade is with each other, there’s going to be endogenous economic integration. [Inaudible] that much policy integration in East Asia as well. So, it’s just the fact of rapid growth, trade-based growth, and a lot of it within the region, that you get this endogenous regional integration – supported by some policy measures, Asean and so on, happening now slowly.

I mean, so, in South Asia, you’ve not had that rapid growth and external, demand-based growth. And the second thing is the India-Pakistan thing, you know? Unless that gets resolved, South Asian integration is not going to proceed; it’s as simple as that. Unless we find ways to crack the India-Pakistan situation, in some way or the other, that’s going to be a problem.

Shuja Nawaz: Thank you. We have two questions here.

Ken Dillon: Ken Dillon, [Inaudible] Press. What challenges does climate change pose to the Indian economy and how do you see India responding?

Arvind Subramanian: So, I mean, I thought I alluded to the fact that climate change is a serious, long-term challenge for India because, I think, the whole water situation in India is a – water is going to be a – it’s a vital resource. It’s going to become a scarce resource, especially, as said, with China controlling the Himalayan glacier.

Now, how is India responding? I think India is not responding very well. A number of things, you know – subsidies means wasteful water use; all the fuel subsidies means that we use more diesel to generate power as opposed to hydro and other things, which means much more environmental pollution. The kerosene subsidy, you know, in India we have this black carbon phenomenon, which is – it’s not just CO2, but an additional layer of complication that’s causing warming.

So, India is not responding very well and the standard explanation or excuse would be that, you know, “We’re still a poor country; we need energy; we can’t do all these things at this stage of development,” which is only partly true because there are also lots of things being done which don’t need to be done.

But my next book is on climate change. My colleague, [Inaudible] and I are writing a book on climate change, a kinda new model of cooperation between developing and industrial countries. I think what is a glimmer of hope in India is exactly this recognition that there’s a China issue with water and, three years ago, a river in Bihar just kinda changed course in such a dramatic fashion that it brought home, to at least two policymakers, the fact that climate change can have these absolutely catastrophic consequences – domestic consequences.

And so, the awareness that India needs to do more on climate change, for climate change and warming, I think that’s gaining more traction in India. It’s far from being translated into action and I think that’s going to be the next step.

Shuja Nawaz: Thank you. Lady – if you could keep it short, please, because we’re about to run out of time. I want to make sure I get everyone in. Thank you.

Stacy Manning: – Sure, of course. Stacy Manning with The American Legislative Exchange Council. We’re a public-private partnership. So –

Arvind Subramanian: All power to you.

Stacy Manning: I’m speaking along the lines of skilled labor. We’ve seen a lack of laborization or, some would say, stagnant laborization in certain markets. I’m thinking specifically of the legal market. And I wonder – can you give us your thoughts on the potential it has for future growth in India? Is that a drag? Will that be a long-term drag? Do we see any progress on that front?

Arvind Subramanian: So, is the question that, you know – yes, it is a drag, but is the first part of your question more related to the fact that India has a – India is closed to foreign professionals coming into India? Is that the –?

Stacy Manning: – Yes.

Arvind Subramanian: – Yeah, that’s the question, right? And there, I think, India is very protectionist on that and there’s, recently, a big Supreme Court case on this, right?

Stacy Manning: Yes.

Arvind Subramanian: You know about that better than I do. And I think that it is a problem. India is closed, but I feel that there is a – I’d be a little bit more optimistic on that because, you see, in all of these things, when a country recognizes that it has an interest in exporting its own labor, the whole symmetry of that changes the dynamic, you know?

So, the more India realizes that it will also have to ship people abroad, therefore, regimes internationally managed – matter for India’s export of skilled labor and even FDI, the more the pressure on India will be to kinda open up.

And I think, also that, you know, a lot of this protectionism comes from the fact that we have a bar council. We have an accountancy thing – you know, all these standard vested interests. But I think the demand for skills is going to outstrip India’s supply. So, at some stage, they have to, you know? So, that’s going to be another impetus for change.

Shuja Nawaz: Thank you.

Thank you. First, let me congratulate you on a very thoughtful and nuanced presentation of India’s prospects.

Shuja Nawaz: – If you could identify yourself.

Male Speaker: – Oh, sorry.

[Crosstalk]

Male Speaker: – I’m [Inaudible]. I’m an Indian journalist.

Shuja Nawaz: Yes.

Male Speaker: All the questions, and also, what you have said – in fact, much of the debate in India – is coming back to this whole governance issue. To get the prices right, to use an old term, you need to get the politics right. The question is, “How?”

I was wondering whether you might like to speculate on whether India’s fiscal administrative structure is outdated. That there is still – there’s – it’s still too centralized. I mean, do we need something like a finance commission, for instance, or should we let states – like in this country – raise their own income taxes and make the central pool much smaller, so that the central governance role becomes much more manageable? I wonder whether you would like to comment on that.

Arvind Subramanian: So, [Inaudible], that’s a great question. That – see, it’s a great question and it’s a great talk because – let me, you know – I think it’s a wonderful question because this is what I say about India: that the advantage of having established the idea of India is that, then, you can let states go, right, because the basic framework is not threatened.

So, in my model of states-based growth, the whole states doing reform, experimentation being rewarded, a corollary of that is exactly what you said – that you need a much more federal economic and tax structure. But so, I see India, eventually, as a model for cooperative federalism, you know, where the basis for dynamism is actually decentralization.

See, and it’s a very interesting contrast with Europe. In Europe, all the tendencies are centralizing as a way of overcoming this crisis, and in India, it’s exactly the opposite. And, in some ways, India is now, today, a bit like where the United States was, you know, maybe 70 to 100 years ago; that, basically, you have the energies being unleashed in a decentralized fashion. But never the threat – and, of course, in the U.S., you needed the Civil War to establish the idea of the United States as a viable political entity that would not be threatened. In India, we have that. That’s the great Nehruvian legacy.

The idea of India, now, is taken for granted. Unleash decentralizing forces, which also means that fiscal federalism has to be much more decentralized, and that’s a necessary corollary of my conception of where India has to go in terms of even its economics and politics.

Shuja Nawaz: So, the bottom line – let’s hear from you. Is the option going to be to muddle through, to kinda let go the growth rate to about 5, 6 percent a year? How does that affect the battle against the population? Or is the option going to be to make those bold changes in policy, the investments in infrastructure, education, etc., so that you can then go back up and challenge China for economic dominance?

As in most countries, it’s going to be trial and error, muddle through, but, you know – but a trial and muddle through where if, you know, we get towards this decentralized form of decision-making, and experimentation, and success, I think on balance, one can hope for. You know, there will always be problems, always be crises, always be difficulty, but I think India is still – the advantage is that people forget that if you’re so far away from the frontier, there’s a lot more scope for dynamism. I think that basic dynamism, India will exploit, for the next 20, 30, years.

So, always, you know, end up with Wendy Donegal, you know? It’s – with apologies to my audience, you know? Everything and it’s opposite is true in India.

Shuja Nawaz: Good way to end this. Thank you again, Arvind, for a wonderful talk. I want to thank my colleagues that helped put this thing together.

[Crosstalk]

Shuja Nawaz: – And make it run so smoothly. And thank you – thank the audience for being an important part of this conversation. Thank you.

[End of Audio]

Duration: 88 minutes

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Thank you for visiting my site. I hope you will come back often to share views on South Asia, Pakistan, its army, Central Asia, nuclear proliferation, terrorism, and counter insurgency warfare. We’ll talk about politics, economics, society, history, art, and the culture of Pakistan. And about Pakistan’s relationships with India, Iran, Afghanistan, China, the Gulf, Middle East, Central Asia, and the United States.

Since 2009 I was at the Atlantic Council, heading the South Asia Center. Here is a link to all my writing and broadcast work during the period 2009-October 2014: Atlantic Council.